Funding: a word, a process that is integral to the entire life cycle of any startup.

A startup needs funding to thrive and scale. In last few years, startup investment has become a serious business in the subcontinent. Many individuals, successful entrepreneurs, 2nd and 3rd generation family business owners, corporate executives have started to invest in startups. As a result startup-fund became readily available……or so it seemed.

Many startups make the mistake of trying to raise fund too early. Unfortunately, raising fund has become the benchmark (or rather Show off) for success to many.

What some startups don’t realise is how dangerous it can be for them. Many have failed because of this, even after raising fund.

Here are few reasons on why a startup should not try to raise fund too early:

A Serious Investor Will Seldom Invest On A Ppt

However harsh it might sound, it is the truth. Investors do not invest on ideas or presentations (ppt) generally. They will need a MVP (minimum viable product) with little bit of traction.

The Cap-table Of The Startup Goes For A Toss

The capital table or the share distribution table is often found to be messy for many startups who have secured early funding. In most cases, where startups got funded during idea stage, will end up diluting a lot of stake. As a result, they won’t get good valuation and will end up with little or not enough to offer during a series A.

Startups Tend To Be More Round Driven Than Result Driven

Most of the time during this type of investment the startups focus shifts from achieving results to raising the next round of funding.

Having said that, it is also true that many startups will require initial funding for building the MVP. There are many govt (DST) funded incubation centers who provides such initial funds in the form of grants (from different govt funds). However, often they can be time consuming.

The best sources for the first funding are the 4 Fs – Friends, Family, Foes and Fools.

Once the MVP is built then it is better to have the focus on results. Setting up short-term mile stones helps in having a clarity in the road map. Results will speak for themselves and will attract the right kind of investors.

Most serious investors don’t tend to invest at early stage. Following are the Appealing factors for such investor to invest:

  • A good idea is never enough. Proof of concept is essential.
  • The quality, passion, commitment, and integrity of the founders.
  • The market opportunity being addressed and the potential for the company to become very big.
  • A clearly thought out business plan, and any early evidence of obtaining traction toward the plan.
  • Interesting technology or intellectual property.
  • An appropriate valuation with reasonable terms.
  • Owners Contribution (not money raised from family and friends- its considered as a grant).

But the first best investor for any startup any day is the customer.

[The author of this post is Saumyajit Guha, Co Principal at Jaarvis Accelerator.]

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